USD Partners LP

Ladies and gentlemen, thank you for standing by and welcome to the USD Partners LP first quarter 2022 results conference call. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the prepared remarks. If you would like to ask a question at that time, please press star 1. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. When asking a question, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Jennifer Waller, Senior Director of Financial Reporting and Investor Relations, for opening remarks. Please go ahead.

Good morning, and thank you for joining us. Welcome to our first quarter 2022 earnings calls. With me today are Dan Borgen, our Chief Executive Officer, Adam Altflor, our Chief Financial Officer, Brad Sanders, our Chief Commercial Officer, Josh Ruppel, our Chief Operating Officer, as well as several other members of our senior management team. Yesterday evening, we issued a press release announcing results for the three months ended March 31, 2022. If you would like a copy of the press release, you can find one on our website at usdpartners.com. Before we proceed, please note that the safe harbor disclosure statement regarding forward-looking statements in last night's press release applies to the statements of management on this call. Also, please note that information presented on today's call speaks only as of today, May 5, 2022. Any time-sensitive information may no longer be accurate at the time of any webcast replay or reading of the transcript. Finally, today's call will include discussions of non-GAAP financial measures. Please see last night's press release, Reconciliations to the Most Comfortable Gap Financial Measures. And with that, I'll turn the call over to Dan Borgen.

Thank you, Jennifer. Good morning, and thank you for joining us on the call today. We are pleased to announce another eventful quarter at the partnership. During the first quarter, we announced the acquisition of the Hardesty South Terminal from our sponsor, as well as the simplification of the partnership's financial structure by eliminating its IDRs. We feel that this was an appropriate step to maintain a momentum in 2022 as we continue to see opportunities for our Druvit by rail network to provide safer and more economic benefits to our customers. Also, simplifying the partnership structure was critical to our growth strategy and further aligning our interests with our unit holders. We expect the acquisition of Hardesty South to provide the partnership with a growth platform by which it can realize the accretion, and additional long-term commitments that our Drew Bit by Rail network is able to support. And we are encouraged about the future as we engage with our customers regarding the second phase of the DRU and the partnership's growth. As a reminder, our Drew Bit by Rail network consists of the DRU, the partnership's Hardesty Rail Terminal, and our sponsor's Port Arthur Destination Terminal, or PAT. The DRU was constructed along with USD's strong JV partner, Gibson, and is located adjacent to the partnership's Harder C terminal. Our Drew Bit by Rail network also benefits the partnership by providing opportunities for longer-term take-or-pay revenues at the Harder C rail terminal, while providing transportation safety and environmental benefits to our customers. Consistent with our expectations from the transactions, Partnerships Board approved another increase to our quarterly cash distribution with respect to the first quarter of a quarter of a cent per unit. In addition, during the quarter, our terminals performed safely and reliably, and the partnership continued to generate a significant amount of free cash flow, which continues to be supported by our strong contract structure and high-quality investment-grade customers. We are fully operational under our new five-year renewable diesel throughput agreement underpinned by an investment-grade rated refining customer at the partnership's West Colton Terminal. This is just the first of hopefully many new opportunities being developed under our USD Clean Fuels Initiative. We look forward to sharing future announcements with the market about the next phase of growth at the DRU and our USD Clean Fuels Initiative. Next, Adam is going to give an update on the partnership's latest financial results and our liquidity position. Then we'll get back into the call and discuss recent market and commercial developments. Adam, please go ahead.

Thank you, Dan, and thank you for joining us on the call this morning. Yesterday afternoon, we issued our first quarter earnings release, which included the details of our operating and financial results for the first quarter. We plan to issue our first quarter 10-Q with additional details after closing market today. The partnership reported net income of $9 million, net cash provided by operating activities of 10.7 million, adjusted EBITDA of 10 million, and distributable cash flow of $8.4 million. Our adjusted EBITDA included the impacts of approximately $500,000 of legal and consulting costs associated with our acquisition of the Hardesty South Terminal and elimination of our sponsor's IDRs. And we anticipate additional transaction costs of approximately $2 to $2.5 million to impact our second quarter financials, which we obviously view as one-time expenses. We will share more details on that when we report our Q2 2022 earnings in early August of this year. On April 6th, the partnership closed the acquisition of the Hardesty South Terminal from USD Group LLC and eliminated our sponsor's IDRs for total consideration of 75 million in cash and approximately 5.75 million common units. The cash portion of the transaction was funded with borrowings under the partnership's $275 million senior secured credit facility. Today, the partnership's combined hard to see terminal has a design takeaway capacity of three and a half unit trains per day, or approximately 262,500 barrels per day. And as Dan mentioned, the acquisition of the hard to see south terminal increases the size, scale, and growth capacity of the partnership's asset base, while optimizing operational and commercial synergies of the hard to see terminal in order to capitalize on growth benefits associated with the sponsor's DRU program. The transaction was approved by the board of directors of the general partner of the partnership based on the approval and recommendation of its complex committee, which consists entirely of independent directors. During the first quarter, our take or pay contracts continue to support strong free cash flow generation at the partnership, as evidenced by our strong DCF coverage of greater than two times. As a result, The partnership declared a quarterly cash distribution of 12.35 cents per unit or 49.4 cents per unit on an annualized basis, representing an increase of a quarter of a cent or 2.1% over the distribution declared for the fourth quarter of 2021. This increase is in line with our previously stated guidance, and the distribution is payable on May 13th to unit holders of record at the close of the business on May 4th. And now I'll go into the details from the quarter. The partnership's operating results for the first quarter of 2022 relative to the same quarter in 2021 were primarily influenced by lower revenues at its Stroud terminal. This lower revenue was associated with a decrease in contracted volume commitments at the terminal that became effective August 2021. Partially offset by recognizing previously deferred revenue in the quarter, associated with the make-up right options granted to our customers as compared to a deferral of revenue in the prior year period associated with the make-up right options. Partnership also had lower storage revenue generated at its Casper terminal associated with the end of one of our customers' contracts that occurred in September 2021. Partially offsetting these decreases was higher revenue at our West Colton terminal, resulting from the commencement of the renewable diesel contract in December 2021. The Partnership experienced higher operating costs during the first quarter of 2022 as compared to the first quarter of 2021, primarily attributable to an increase in operating and maintenance costs at the Hardesty Terminal for increased operational supplies and utilities costs, resulting from increased throughput and higher fuel costs. As mentioned, the Partnership also experienced higher selling, general, and administrative costs during the first quarter as compared to the first quarter of 2021. mainly due to approximately $500,000 of legal and consulting fees incurred related to the previously mentioned acquisition of the Hardesty South Terminal. Debt income increased in the first quarter of 2022 as compared to the first quarter of 2021. The impact of the operating factors already discussed were offset by a larger non-cash gain associated with the partnership's interest rate derivatives and lower interest expense incurred during the first quarter of 2022, resulting from lower interest rates and a lower weighted average balance of debt. outstanding during the quarter as compared to the first quarter of 2021. Related to the drop-down transaction, the partnership rolled its existing interest rate swap into a new interest rate swap on April 11th. The new interest rate swap is a five-year contract with $175 million of notional value that fixes the secured overnight financing rate, or SOFR, to 1.57% for the notional value of the swap agreement instead of the variable rate that we pay under our credit agreement. The swap settles monthly through its termination date in March of 2027. Turning back to the quarter, net cash provided by operating activities for the quarter decreased 15% relative to the first quarter of 2021, primarily due to the operating factors already discussed and the general timing of receipts and payments of accounts receivable, accounts payable, and deferred revenue balances. Adjusted EBITDA and distributable cash flow decreased 31% and 33%, respectively, for the quarter relative to the first quarter of 2021. The decreases were primarily a result of the factors already discussed, including the impact of the $500,000 for transaction expenses related to the acquisition of the Hardesty South Terminal. Additionally, DCF was impacted by higher cash paid for taxes, partially offset by a decrease in cash paid for interest and maintenance capital expenditures during the quarter. As of March 31st, the partnership had approximately $4.5 million of unrestricted cash and cash equivalents and undrawn borrowing capacity of $112 million on its $275 million senior secured credit facility, subject to the partnership's continued compliance with financial covenants. As of the end of the first quarter of 2022, the partnership had borrowings of $163 million outstanding under its revolving credit facility. The partnership was in compliance with its financial covenants as of March 31st, 2022. Subsequent to March 31st, the partnership borrowed an additional $75 million under the Senior Secured Credit Facility to finance the cash portion of the Hardesty South acquisition. As such, the partnership had outstanding borrowings of $238 million as of May 2nd and available undrawn borrowing capacity under its Senior Secured Credit Facility of $37 million, subject to continued compliance with its financial covenants. Our acquisition of Hardesty South is treated as a material acquisition under the terms of our Senior Secured Credit Facility, and as a result, our borrowing capacity will be limited to five times our 12-month trailing consolidated EBITDA through December 31, 2022, at which point it will revert back to 4.5 times our 12-month trailing consolidated EBITDA. As Dan mentioned, we are excited about our recent acquisition of the Hardesty South Terminal, as well as our simplification of the partnership's financial structure. We are extremely focused on our growth initiatives at the DRU, as well as USD Clean Fuels, and we look forward to sharing more updates with you in the future. With that, I'll now turn the call back over to Dan.

Thanks, Adam.

Now I'll ask Brad to give us a detailed update on the WCS market, recent market events, and an update on our commercial activities.

Brad? Thank you, Dan and Adam. Let me start with a macro update.

And there are three critical themes that are currently driving current volatility and price action. One, of course, is the Russian-Ukraine conflict. Everybody's aware of that and the disruptions it's creating, not only from a supply standpoint, but getting molecules where they need to be on time. But in addition, we've had an extended period of underinvestment. in the fossil fuel space, and that is becoming evident because we're now seeing global demand, despite the China COVID uncertainties, global demand returning to pre-COVID levels and higher. So the combination of all three of these have naturally driven global inventories in all commodities, crude and light products, to historical low levels and prices have gone up to reflect that. If you look at changes in prices since the conflict began, crude is up effectively $10 a barrel since that period. But more importantly, gasoline is up $30 a barrel. and distillates almost $46 a barrel since the conflict began. So naturally, this is a demand-led event. So the combination of growing international demand and supply disruptions is creating this high volatility, high price, and high margin business for refiners. This is naturally then leading with these higher prices to higher netbacks to our Canadian potential customers and producers. So our expectation there is that we will see production levels increase as a function of this. We'll see production levels increase as a function of previous announcements of Canadian producers pursuing new production in 2022 relative to 2021. And given that inventories are now on the lower end of the five-year average up in Canada, our expectations are that we will see those inventories begin to build and ultimately demand for crude by rail egress solutions will reveal themselves in the second half of 2022. With that, I'd like to then provide a quick update commercially on primarily three activities that we're focused on. Dan and Adam both mentioned our success in running our DRU and our DRU network. So naturally, we are focused on transitioning 100% of our current rail capacity to support the growth in our DRU efforts and the network efforts. And this is driven for the reasons that we've shared with you in the past. Primarily, there is a safety story, an ESG story that is critical with the rail through bit egress solution. And there are greenhouse gases and environmental issues that are positive and competitive and relative to egress alternatives. But equally important, there are condi savings, there are transportation savings, and there are custom blend value upgrade opportunities as our customers deal with a Drewbit product at origin through transportation and as they commercialize their sale of bitumen and or custom blend in the U.S. Gulf Coast. So we naturally are in detailed and meaningful discussions and negotiations with both producers and refiners as we pursue not only a second, but a potential for a third customer to support the DRU and our DRU network, which includes not only the Gulf Coast and our Port Arthur facility, but the potential for our facility in the mid-continent at Cushing, which is called our Stroud facility. So we're pleased with the progress of our current operations and equally pleased then with the natural discussions that is driven with new customers as we pursue growth opportunities. Secondly, we have our existing businesses that have periods where contracts run their course. We have a number of contracts, three contracts specifically that end by the end of, I believe it's June 30th, and we're in detailed discussions to renew and extend those contracts and to transition those contracts to a DRU solution over time. Given the point of view that I shared with you earlier that we expect production to exceed 2020 levels, the second half of 2022, and that inventories will build, our expectation is we'll be able to renew and extend those contracts in the second half of 2022. And then finally, Dan and Adam mentioned about our progress in our clean fuels business. Clearly, the efforts to decarbonize and substitute traditional transportation fuels is creating a number of opportunities in this space, and it includes not only the traditional molecules or opportunities in ethanol, which is a substitution product, but also in renewable diesel, strategic or sustainable aviation fuel, feedstocks to producers of renewable diesel who have been traditional refiners who now are looking for non-traditional feedstocks and need infrastructure to support that. And then second-order effects that affect feed and protein solutions that require logistical solutions just to support the decarbonization efforts and substitution efforts. So we're really excited about what those opportunities are, and they change constantly, which makes this space pretty unique. And we've, in response to the value that we think we see in this space, we've made investments in our organization and created a mix of capabilities and resources that are experienced in the space and have relationships in this place with not only traditional counterparties, but with the railroads who will support solutions to ensure that the required logistics are invested in and supported to make these solutions happen. So we're very excited about next steps in this space and the growth opportunities that we see.

With that, I'll turn it back over to Jennifer. Thank you.

Thank you, Brad. With that, we'll open up the call for any additional questions.

At this time, if you'd like to ask a question, please press star 1 now on your telephone keypad. Again, that is star 1 on your telephone keypad. We'll take a question from Steve Farazani of Sedoti. Your line is open.

Good morning, everyone. Appreciate all the color on the call. I did want to ask about, you know, we saw the sequential revenue improvement. based on the West Colton deals. We saw costs up a little bit, but not, you know, not huge. When I think about the distributable cash flow, it looks like primarily there might have been some issues on the working capital front. Can you walk through that a little bit?

Yeah, I mean, primarily around the decrease would have been around the revenue around our Casper terminal and then also around slight decreases around Stroud. I would also say there have been, as you'll see in the queue when we file it later today, there were some rates that have decreased as part of the contracted arrangements that took into effect late last year. And so that's the primary reason between between, I guess, the primary reason for the decrease in revenue you see.

No, but what I'm asking is the sequential change, which was positive. Everything looks positive on the quarter sequentially, other than distributable cash flow, and that looks like primarily a working capital issue, or maybe I'm missing something.

Yeah, I would say it's... The timing of those payments, sometimes you see some seasonality there in Q1, but otherwise, yeah, I mean, the operations are pretty consistent as far as how we receive the take-or-pay revenue and the OPEX. So nothing really on the color around the working capital from our end. We typically get the – they usually work out over time with regard to AP and AR. Nothing major to comment on there.

Great. Thanks. In terms of Casper, which I guess we haven't talked about a lot, but with the extra capacity on the Express, you expected maybe some opportunities there. Is that not developing?

This is Brad. Yeah, it hasn't yet. And Casper uniquely is sensitive to the market relationships that we speak to. In other words, you need market spreads that create incentives for folks to not only use Express but have the intention to use rail for egress. So we're hopeful that in the second half of this year that we will see throughputs increase. There's a number of commercial solutions that are sought through CASPER. that have different incentives. So we do feel current differentials look like in the second half will drive higher throughput. And depending on where we end up with those differentials, it could have the potential to lead to some contract-type discussions. So we're hopeful that the market's going to support further throughput in the second half.

Great. Thanks for that. And then to touch on Stroud, where are you with the investment there, the additional storage tank and progress on adding that infrastructure?

Yeah, that second – Oh, go ahead.

Go ahead, Brad.

Yeah, I was just going to say quickly that second tank becomes available July 1, and so that gives us the opportunity to carry or to handle a number of grades – through our Stroud Terminal, and we're in discussions with counterparties now about their interests and the benefits associated uniquely with the Stroud Terminal.

Great, great. And then last one. The only thing I would add to that is we're on time on budget relative to the project.

Fantastic. Last one I wanted to ask about is you sound very positive on conversations you're having around the DRU, understandably. Just trying to get a sense if you do get a customer either to transition to the DRU that you already have or even a new one, what's the timing in terms of the infrastructure needed once you lock in a new customer under a long-term agreement?

I'll answer that. So if you think about our DRU rail network as a whole, you've got origin improvements at Hardesty relative to the DRU, and then some infrastructure improvements at Port Arthur in particular, but also some retrofitting of Stroud as an option as well. Both of those projects at origin and destination are around 16-month build times. And as a reminder, we've shared in past calls our permitting activities for both origin and destination are already completed, and ultimately we're shovel-ready to support that growth. So really it's a 16-month construction timeline. The long lead items, we're actively involved in that process now, planning for growth, and we don't see anything out there that puts that kind of timeline at risk.

Great. Thanks for all the comments.

Thanks, Steve. At this time, I'd be happy to return the call to Dan Borgen for any concluding remarks.

Thank you, Steve. I mean, thank you, Leo. We appreciate that. As always, we appreciate the support and are excited about the future as we enter the next phase of the Partnerships Growth Story. You know, the DRU and the clean fuel strategy continues to be Our main focus, we're highly encouraged with that, customers at the table for all the right reasons, and we can really feel good about that. In this environment, to be able to, pun intended, when we can lower the cost on the environment as we're doing with our DRU program, it means a lot to us to be able to do that. And while still being able to create a higher net back to our customers, moving a non-haz, non-clammable product. likely as well with our clean fuels business, again, being able to deliver some of the lowest carbon intensity product to the West Coast and continuing to grow that platform. Obviously, in this environment, again, pun intended, we're really encouraged by that and have several meaningful discussions going on with customers around that. So again, thanks again for dialing in. We'll continue to keep updated on what we're doing and look forward to future announcements regarding the success. Thank you.

This does conclude today's USDT Q1 2022 earnings call on webcast. You may now disconnect. And everyone, have a great day.